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How to Get a Car Loan When You’re Self-Employed?
January 11, 2021● 4 minute read●
The answer to this is yes! Yes, you can definitely get a car loan if you’re self-employed. You’ll just need to cross more hurdles. Learn how to simplify this process and boost your chances as you read on.
Why is it more difficult to get a loan while self-employed?
Self-employment offers a great shot at freedom by being your own boss. You’re solely in charge of your life, time and income. Sounds great yeah? In fact, self-employment is now much more common as more people are taking the plunge. But self-employment also has its own pros and cons. One of these cons is the difficulty involved in taking out a loan. But why is this also?
There is one major factor lenders consider before borrowing your money, and that is proof of regular and stable income. However, self-employed income is not that stable and it’s difficult to predict how much you earn monthly. Lenders do not want a situation where you’re no longer able to pay their money cause your business went under the water. This isn’t enough cause to stop you from getting a loan, however, and due to the increased growth in self-employment, more people on self-employment are demanding credits and the finance sector has been moved to derive special criteria for lending to the self-employed. Note that there are some steps to take that can improve your chances and make your application process smoother and easier.
How to get a loan being self-employed?
Check your credit
It goes without saying that your credit is very important as a self-employed loan seeker. Your credit history tells the lender if you’re a high risk or low risk borrower. Your credibility can be gauged based on your credit score. Lenders like to give out loans to people who have good credit scores. A good credit score shows that you make loan repayments promptly and make bill payments on time. However, a bad credit history will show that you’ve been defaulting with past loan repayments and probably swimming in other debts. Lenders can’t trust people with bad credit score and their application is more likely to be denied or there’ll be granted loans with really high-interest rates.
It’s important to review your credit report as a self-employed loan seeker before meeting with your lender. Your credit report shows all your past credit transactions, existing loans, bank overdrafts and the number of loan applications you’ve made amidst other important information. Make sure you request a copy from any of the credit bureaus and properly review for errors that can be corrected before submitting to your lender. You should have a good credit score to stand a chance of getting a better loan deal. However, you can always take time out to build credit if your credit rating isn’t that good.
Proof of income
Lenders need to be sure you can afford the loan and as a self-employed person, you’ll be asked to provide a copy of your bank statement over some months to calculate your average income. Lenders will also place a credit limit based on your income. You’re more likely to get approved for a loan with better rates the higher your income. You can also present tax returns and tax transcripts as proof of income if you run a business.
Proof of residence
You need to show proof of stability with your address history. The longer you’ve been self-employed or living at your particular address, the better. A stable address also proves to the lender that you pay your rent or mortgage and can be trusted financially. Prompt utility and cable bill payments can also further proof your credibility.
Save up a huge deposit
The down payment is a percentage of the total amount needed to purchase the vehicle. Most lenders usually require a deposit of at least 10% of the purchase cost. However, it is advisable to save up to or more than 20% of the purchase price. This will help you pay off most of the car’s value within a short loan term. Cars depreciate and you don’t want to be paying more than your car’s worth over the months. You’ll also pay less interests over time with a short loan term. You’re more likely to get the loan when you present a huge deposit because the lender is placed at less risk.
Consider a co-signer
A co-signer or guarantor is a close friend or family member who agrees to make loan repayments if you fail to do so. This person stands as a form of security for your loan as lenders know that they’re getting their money back one way or the other. The co-signer can also offer their asset or property as collateral for the loan. This can boost your chances of getting better interest rates on the loan. It is important for the co-signer to fully understand the terms and conditions of the loan. Their property or asset can be seized if you fail to make due loan repayments. The co-signer’s credit can also be negatively affected if you default on the loan terms. Make sure you’re totally open with your co-signer to prevent your relationship from going sour.
Consider a business car loan
If you’re planning on using the vehicle for business purposes most of the time, then consider taking a business car loan. A business car loan offers more flexibility and tax benefits. Your interest rates may also be lower if you’re going for a business car loan. In the case of a business car loan, the car becomes your asset from the beginning of the loan term and you have rights to full ownership. However, a business car loan also comes with the same risk as a standard car loan if you’re unable to make due loan repayments.
Make sure you shop around and do due research before signing a loan agreement. Get quotes from multiple lenders to have more competitive rates and options. Remember to also consider fees and taxes when reviewing quotes.
Written by Jacaranda Team